JSW Said to Face First Output Drop in Decade: Corporate India

By Abhishek Shanker -
Dec 4, 2012

JSW Steel Ltd. (JSTL), India’s third-largest
producer, is facing its first annual drop in output in at least
10 years because of a shortage of iron ore at its biggest mill,
said two people familiar with the matter.

Production at the Vijayanagar plant in southern Karnataka
state may be lower than the 7.43 million metric tons made in the
year ended March 31, the people said, asking not to be
identified before a public announcement. The Mumbai-based
steelmaker, in which Japan’s JFE Holdings Inc. (5411) holds a 15
percent stake, targeted 8.5 million tons this fiscal year.

Dwindling output at the 10 million-ton capacity plant will
impede earnings and JSW’s share of India’s steel market, which
is forecast to grow 5.5 percent this year, more than double the
global pace. JSW, which relies on sales of automotive steel and
galvanized sheets used in construction, is failing to exploit
demand for vehicles, homes, roads, ports and bridges in an
economy that grew 5.3 percent in the quarter ended Sept. 30.

JSW rallied 51 percent this year, outperforming the
benchmark Sensitive Index’s 26 percent advance, as investors bet
the increase in capacity would help the company close the gap
with bigger rivals Tata Steel Ltd. (TATA) and Steel Authority of India
Ltd. (SAIL) The shares rose as much as 1.3 percent to 764.95 rupees and
traded at 763.95 rupees as of 9:48 a.m. local time.

“The company has so far performed better than expected
given the problems of raw material supplies,” said Giriraj Daga,
an analyst at Nirmal Bang Equities Pvt. in Mumbai. “The company
has managed to somehow secure iron ore and may continue to do so
in the future.”

Mine Disadvantage

Production at JSW has risen every year since at least 2003
and has quadrupled in the nine years ended March 31 to 7.43
million tons, according to the company’s annual reports.

Global steel demand is predicted to increase 2.1 percent
this year and 3.2 percent in 2013, according to Worldsteel.

Having no iron ore mines of its own places JSW at a
disadvantage to Tata Steel and Steel Authority, whose mines
supply all their needs. Tata Steel and Steel Authority are
increasing their iron ore capacities by expanding the mines or
starting new ones.

Tata Steel in December last year won government approval to
raise capacity at the Khondbond mine in Odisha state to 8
million tons from 5.4 million tons, while Steel Authority in
February 2011 got permission to mine at Chiria, in the eastern
state of Jharkhand, estimated to hold more than 1 billion tons.

Court Ban

A court-ordered mining ban in the richest iron-ore
producing regions of Karnataka in August last year dried up
supplies of the key raw material for JSW and other steel mills
in the area. JSW, which completed expansion of the Vijayanagar
plant in July 2011, was left without raw material to feed the 47
percent increase in capacity. Factory use declined to as low as
30 percent in September last year.

Supplies marginally improved in October 2011 after the
Supreme Court allowed supervised auctions of iron ore lying in
stock at the various mines and permitted state-owned NMDC Ltd. (NMDC)
to restart mining a month before. Another 18 miners were allowed
to resume operations in the state in September after procuring
fresh government approvals.

Short of Demand

Still, supplies of the raw material are far short of JSW’s
demand. The steelmaker needs about 16 million tons of ore to run
the Vijayanagar factory at full capacity and supplies procured
from auctions will last only until the end of this month, one
person said. The plant is currently running at about 70 percent
capacity, the person said.

While JSW may produce as much as 6.4 million tons by
December, in line with its target, ore supplies will probably
shrink starting January, one of the people said. Output at NMDC,
cleared to mine as much as 1 million tons a month in Karnataka,
fell 7 percent in the six months ended Sept. 30, Chairman C.S. Verma said on Oct. 23. The miner, based in the southern city of
Hyderabad, is selling all its production in Karnataka through
online auctions.

Three months after the ban was lifted, only four mines have
restarted, with a total capacity of about 2 million tons, while
the others are facing bureaucratic delays, the people said.

Karnataka, which has an annual steel output of about 17
million tons, is operating at about 60 percent capacity as
smaller furnaces shut due to the ore shortage.

Importing iron ore is not an option for JSW because
Vijayanagar is located about 350 kilometers (218 miles) from the
nearest port of Belekeri, making transportation unviable, one
person said. Supplies from other iron ore-rich states including
Odisha, Chhattishgarh and Goa have become scarce and expensive
because of mining restrictions or complete bans imposed by the
environment ministry.

Supplies from Odisha fell following the regional
government’s steps to curb illegal mining for the past two years,
while Goa banned all mining from Sept. 11. The ban came after a
government panel in a Sept. 7 report to lawmakers said the
western province may have lost 349.4 billion rupees ($6.4
billion) because of illegal mining.